Market Update: Escalator and Rotations

Posted 02/8/2017 by Jason Obradovich

I have heard no better analogy in describing the post-election euphoria around future GDP and interest rates than comparing the state of the markets to an escalator. In many people’s minds the economy, thanks to historically low interest rates for an extended period of time has put the US economy onto an escalator which will continue to rise for the years to come. The analogy has been used over and over again in recent weeks and some have come to suggest that not only will the Fed raise rates three times this year but likely four times. Personally I can think of no worse analogy to describe the markets or the economy today. The challenges faced today are not much better than they were eight years ago. There may be no financial crisis but there is little gun powder the Fed can use today and the increasing national debt is a serious cause for concern. Below I’ve laid out a case for both sides to the argument as to which direction rates are headed.

The case for rates staying relatively low is somewhat backwards facing but here are the main points to consider:

Inflation has been stubbornly low and the forward view of inflation is to remain very low.

Oil prices appear to be very contained thanks to the US producing more than at any point in time in history; the US is currently the largest producer of oil in the world and experts are calling for oil to drop this year.

The payroll report last week showed wage inflation to be unexpectedly lower than anticipated, especially considering how low the unemployment rate is.

While quarterly GDP has stabilized, it should never be presumed that it will automatically go higher; there needs to be an environment that allows it to move higher and that environment does not exist yet.

In looking at the world since the financial crisis, $57 trillion in incremental debt has been added; so has the world grown or just borrowed its way into prosperity?

The national debt to GDP ratio has continued to grow exponentially and rising interest rates will only increase the debt load

The debt ceiling has not been raised and the talk of tax cuts and infrastructure spending will only make the issue more challenging

The legislature is very divided and it’s more likely than not that Republicans will lack full support to pass a tax code overhaul

A stronger dollar will hurt the manufacturing sector

The case for rates moving higher should have and does have a forward looking slant so it largely relies on speculation:

Economy has reached full employment

Although wage inflation moved down slightly last month it has continued to move higher for 2 years

Reduced regulation in the environmental and financial sectors should raise GDP

GDP is anticipated to be over 2% on a year-over year basis for all of 2017 and 2018

The economy continues to add 100’s of thousands of jobs each month

Tax code overall would likely spur short to medium term growth

Infrastructure spending would increase short term growth

Repatriation of billions of dollars could spur growth

Today the 10yr is down to 2.33% based upon doubts that the pro-growth policies will come to fruition. If the 10yr breaks below 2.29%, then it’s very possible it could go below 2.20%. From 2.20% could be a material drop to 1.80%. That is very far away but still on the table of possibilities. If the Republicans deliver on all of their pro-growth promises that have raised the market to these levels then the 10yr could test the 2.60% limit; and from there it could move to 3.00%.

While economic data is important, global politics will drive markets more than any particular calendar release.

Next Article

All Articles
(1 of 441 articles)

News, Press Releases & Blogs

Jason Obradovich is back with another Mortgage Rundown. What is happening with interest rates? What will happen at the first FOMC meeting by Jerome Powell? Will the Fed raise interest rates? Tune in...

Recent Blog Posts

We at New American Funding take great pride in our customer service and make it our number one priority. We encourage you to contact us for complaint resolution or any post-closing questions you may have regarding the servicing of your loan. We strive to have your experience with New American Funding a stellar one. In the rare case that our service did not meet your expectations, please call our customer care hotline at 1-800-450-2010, ext. 7100 or you may contact us by email at customerservice@nafinc.com. Please leave a detailed message and we will follow up with you no later than the end of the next business day.